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Does political economy reduce agency costs? Some evidence from dividend policies around the world

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  • Choy, HiuLam
  • Gul, Ferdinand A.
  • Yao, Jun

Abstract

This study shows that firms in proportional-electoral countries pay out lower dividends and that the correlation between a firm's growth potential and dividend payout ratio is weaker in proportional-electoral countries. However, firms in proportional-electoral countries that cross-list in majoritarian system countries, tend to pay out higher dividends and the negative relation between growth potential and dividend payout tend to be stronger than their peers that do not cross-list. For a few countries that changed their electoral system towards a more proportional system, we observe a decrease in dividend payout ratio and a weaker relation between growth and dividends after the change. Overall these results indicate that a country's political system affects the severity of agency problems. Further, the effect of legal origin on dividend policy reverses once we include the political economy variables in the regressions. We also document that the electoral system not only affects the amount of dividends paid by a firm but also the form of payment.

Suggested Citation

  • Choy, HiuLam & Gul, Ferdinand A. & Yao, Jun, 2011. "Does political economy reduce agency costs? Some evidence from dividend policies around the world," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 16-35, January.
  • Handle: RePEc:eee:empfin:v:18:y:2011:i:1:p:16-35
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    6. Lim, Mable & How, Janice & Verhoeven, Peter, 2014. "Corporate ownership, corporate governance reform and timeliness of earnings: Malaysian evidence," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(1), pages 32-45.
    7. Yun Zhu, 2015. "Political uncertainty and non-pricing terms of financial contract," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(1), pages 77-109, June.
    8. Lai, Karen M.Y. & Saffar, Walid & Zhu, Xindong (Kevin) & Liu, Yiye, 2020. "Political institutions, stock market liquidity and firm dividend policy: Some international evidence," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(1).
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